Stocks Stumble Into May
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Blowout Q1 earnings pushed the S&P 500 and NYSE to several record highs this week but the broader market gains were limited on choppy forward guidance. Economic data was strong and showed an economy that was opening to pent-up demand. Despite investor concerns that inflation was on the rise, the FOMC Meeting concluded with rates unchanged and Chairman Powell stating that the economy was “a long way from employment and inflation goals.” Interest rates inched higher but remained off the highs set in mid-March giving banks a boost. Crude oil prices were higher as OPEC saw an increase in demand as global economies reopened, while copper prices hit a 10-year high. Better than expected earnings from Amazon.com (AMZN), Microsoft (MSFT), Facebook (FB), Alphabet (GOOGL), Caterpillar (CAT) and Advanced Micro Devices (AMD) left their shares mixed as traders sold the news after the stocks had rallied into earnings. The sectors were also mixed with strength in Energy (XLE), Financials (XLF) and Communication Services (XLC) offset by weakness in Technology (XLK) and Healthcare (XLV). The period ended with another round of profit taking on Friday ahead of more earnings next week and the major averages closed out the last week of April mixed.
For the period, the DJIA traded lower for a second straight week losing 168.64 points (-0.5%) and closed at 33874.85. The S&P 500 added 1.00 point (+0.0%) and settled at 4181.17. The NASDAQ gave up 54.13 points (-0.4%) to close at 13962.68, while the small cap Russell 2000 snapped a two-week win streak slipping 5.41 points (-0.2%) finishing at 2266.45.
Market Outlook: The technical condition of the market deteriorated this week as the major averages were mostly lower, but new highs were made in the S&P 500, NYSE, NASDAQ and DJ Transportation Index. The technical indicators are mixed with MACD, a short-term trend gauge, slipping into negative territory for the different indexes, while Momentum, as measured by the 14-day RSI, neutral and slowing. The exception is the DJ Transportation Index which continues to outperform and finished higher for a 13th consecutive week, its longest weekly win streak in 32 years. A look at the weekly charts for the major averages, however, shows a bullish trend remains in place and we could still see prices step higher. Weekly charts will often show early signs of negative divergence and warn of market tops, but the market’s condition remains bullish on the charts. Despite this week’s market weakness, underlying breadth was positive with the NYSE Advance/Decline line, which is a leading indicator of market direction, hitting several new highs and the NASDAQ A/D line also finishing positive. New 52-week highs expanded during the period showing more stocks participating in the rally. On Thursday, new 52-week highs on the NYSE hit the highest level since mid-March (444). Investor sentiment continues to show excessive bullishness and this week we saw the National Assoc. of Active Investment Managers (NAAIM) Exposure Index climb to 103.7, meaning hedge funds are buying on margin. In addition, FINRA’s Customer Margin Balance Form hit another record high in March of $822,551,000. While not a reason to sell, this reflects that bullish sentiment is getting frothy and does raise a cautionary flag.
First quarter earnings are coming in strong with 84% of companies beating estimates. Not only topping consensus but beating estimates, on average, by +21.7%. The problem is that stock prices are already reflecting surging demand as the economy reopens and year-over-year comparisons are going to be difficult. We get another busy round of earnings next week as we enter the month of May and an old Wall Street adage says ‘sell in May and go away’. While the rally could pause as earnings season winds down, at this stage the technical indicators and Market Edge timing models are not suggesting that the market is ready to selloff, yet. However, risks from the pandemic remain, especially outside of the US. Furthermore, if the Federal Reserve is seen as being behind the eight-ball on inflation, the market could struggle come summer.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Currently, the CTI is Positive at +3, unchanged from the previous week. Cycles B and E are bullish, while Cycles A, C and D are bearish. The CTI is projected to remain in Bullish Territory into May.
Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Neutral at +1, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 414 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was mixed at the NASDAQ as the A/D line lost 277 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 70.4% vs. 61.9% the previous week, while those above their 200-day moving average eased to 87.3% vs. 87.5%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. In addition, we track money flows into and out of Equity Funds and ETFs which as of 4/28/21 shows outflows of $3.1 billion. That marks 11 consecutive weeks of inflows. Currently, the Sentiment Index is Negative at -4, unchanged from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 11/13/2020 (DJIA – 29479.81). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 3 | 3 | Positive | ||||||
| Momentum Index: | 1 | 1 | Neutral | ||||||
| Sentiment Index: | -4 | -4 | Negative | ||||||
| Strength Index – DJIA (DIA): | 69.0 | 62.1 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 59.4 | 54.2 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 62.4 | 60.2 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 33874.85 | 34043.49 | -0.5% | ||||||
| S&P 500 Index: | , | 4181.17 | 4180.17 | 0.0% | |||||
| NASDAQ Composite Index: | 13962.68 | 14016.81 | -0.4% | ||||||
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